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Facebook Fallout Widely Scattered

Facebook Fallout Widely Scattered

The consequences of Facebook's messy IPO won't be limited to the company's top brass or the underwriters who managed -- or perhaps mismanaged -- the event. They could spread all the way across the social network's humongous user base. Facebook will have to go after every conceivable revenue opportunity over the next three months, noted Salto Parters' Andreas Scherer.

By Erika Morphy
05/23/12 9:02 AM PT

After dropping to US$31 per share on Tuesday, Facebook's stock is hinting at a turnaround Wednesday morning, hovering around $32.15 per unit.

Unless the stock surges past its $38 per unit launch price, however, it is hard to imagine how those responsible for its disappointing debut -- a group that includes lead underwriter Morgan Stanley, Nasdaq officials and Facebook itself -- will be able to redeem themselves in the eyes of irate investors, disappointed employees and suspicious regulators.

Some of the factors behind the mess that was the company's IPO are now well known. A glitch in Nasdaq's trading system cause a two-hour delay, panicking investors and traders.

Indeed, that event has already triggered a lawsuit, filed by an aggrieved shareholder who alleges Nasdaq failed to process orders in a timely fashion. The suit, filed in in U.S. District Court for the Southern District of New York against Nasdaq OMX Group, is seeking class action status.

20/20 Hindsight

More recently, it has emerged that underwriters Morgan Stanley, Goldman Sachs and JPMorgan downgraded their earnings forecasts for Facebook shortly before the IPO, a highly unusual development.

As lead underwriter, Morgan Stanley in particular is in the hot seat for its performance. Massachusetts has subpoenaed it, and judging by comments from officials at the U.S. Securities and Exchange Commission and FINRA, more regulatory action is likely not far behind.

In what seems to be a mass adoption of 20-20 hindsight, the scuttlebutt is that the stock was overpriced all along, even taking into account Facebook's and the underwriters' desire to avoid a big first day pop.

Investors, especially institutional funds that placed those first orders for Facebook stocks, have clearly been hurt by the series of events.

But when assessing the fallout from the failed IPO, there are other groups to consider as well.

Working Toward a Goal

Count Facebook employees among those hurt by the preceding days' events, Trip Chowdhry, managing director of equity research for Global Equities Research, told the E-Commerce Times.

"First, look at who has benefited the most from the IPO -- executives at Facebook and members of its board of directors. It is the employees that have been shortchanged because many joined the company expecting there to be an IPO -- and expecting that IPO to be much more highly valued than it was."

These people have been working long days for months, if not years, expecting the payoff to come when the company went public, Chowdhry said.

Morgan Stanley Takes the Heat

Morgan Stanley investors will also feel some of the brunt of these events, David Johnson, principal with Strategic Vision, told the E-Commerce Times.

"Morgan Stanley is going to be the whipping boy for what happened. Right now, the message the general public is getting from the media is that Morgan Stanley did something wrong with Facebook and that is why the stock is floundering."

Whether it is true or partly true doesn't matter any more, he said. "That is the drumbeat that is being sounded not only on the news but among Wall Street insiders as well."

Facebook will not get escape the blame game. Allegations that it wasn't forthright or was overly optimistic about its prospects are already being voiced.

It will get worse as its competitors take advantage of what happened, thus exacerbating this particular narrative, Johnson added.

"If I were a competitor I would be running a campaign trying to reach investors with the message about how 'we are different,' that 'we abide by laws, we don't break them,' 'we know what the new normal is and what is appropriate for Wall Street in this economy.'"

Another potential group to suffer will be Facebook's users. Facebook will have to go after every conceivable revenue opportunity over the next three months, Andreas Scherer, managing partner with Salto Partners, told the E-Commerce Times. "The company has no margin whatsoever for its first quarterly report."


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